Digital Battlefront in the Tax Wars

Abstract

We argue that the high revenue triggers in proposed digital taxes — including the recent Franco-German proposal for a digital advertising tax — may violate state-aid law and prohibitions on nationality discrimination in the Treaty on the Functioning of the European Union.

We explain how both digital taxes adopted by particular member states and digital taxes as an EU directive may discriminate against the EU subsidiaries of US-headquartered tech companies.

Our arguments depend critically on two features of proposed digital taxes: (a) their high revenue triggers, which ensure that only very large, and therefore disproportionately foreign, companies pay digital taxes; and (b) their narrow scope, which ensures that only companies operating in specific
disfavored sectors face taxation.

To the extent that any digital tax proposal (whether unilateral or EU) ends up sharing these features, it would face the same challenges. If those flaws were corrected, digital taxes
would be less discriminatory, but also less politically palatable.

Keywords: digital services tax, DST, digital tax, EU law, digital PE, permanent establishment, tech tax, web tax, google tax

JEL Classification: K34